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Abstract

Investors value the liquidity and safety of U.S. Treasury bonds. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 72 basis points, on average over the period from 1926-2008. The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money. Evidence from quantities supports this idea. When the supply of Treasuries falls, reducing the overall supply of liquid and safe assets, the supply of bank-issued money rises.